ASE Technology Holding Co., Ltd.

Hello, I am Ken Xiong, the head of investor relations for ASE Technology Holdings. Welcome to our second quarter 2019 earnings release. All participants consent to having their voices and questions broadcast via participation of this event. Please refer to our safe harbor notice. I would like to remind everyone on this call that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, our dollar figures are generally stated in new Taiwan dollars, unless otherwise indicated. As a Taiwan-based company, our financials are presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially. from other accounting standards. For today's event, I will be going over the financial results. Then we will have a Q&A session with Joseph Tong, our CFO. As a reminder, because ASC Holdings was jointly formed on April 30th during the second quarter of 2018, as a legal entity, our spill subsidiaries results are consolidated only as of that date going forward. Results for the legal entity are labeled legal entity basis. For the sake of comparability, we have also included results which are compared against a pro forma set of results as if SPIL was a subsidiary and consolidated as of the beginning of 2017. This set of results is labeled pro forma basis. Given that the transaction was completed during the second quarter, the legal entity and pro forma basis will have the same sequential comparisons between the first and second quarters. However, the pro forma numbers are still relevant for the quarterly year-over-year comparisons. First order of business. First order of business is a quick update on our original goal set at the beginning of the year. We believe that these key measures would help define how well we perform during the year. Please evaluate these points in the context that they were achieved during what has generally been viewed as a soft loading environment. Both our advanced packaging and test businesses outgrew our overall ATM business. During the first half, the advanced packaging business grew 6% year over year. The growth was driven off of increasing customer adoptions from increasing IO density and product complexity. Our test business also continues to outperform, growing 7% year-over-year. We believe we can continue to take market share via a re-geared engineering and turnkey strategy. SIP also grew by more than 25% during the first half year-over-year. We are also well on our way to achieving our $100 million incremental new SIP business for the year. we are making the appropriate investment in critical R&D areas across both ATM and EMS, such as the various types of fan outs, the next generation of bumping, and SIP. During the first half, we have increased our R&D costs by 12% for AATM and 9% for EMS when compared with first half of last year. We believe these expenses are a modest investment for the impact they can potentially achieve. For our second quarter performance, compared to typical seasonality, our ATM business experienced a relatively mild uptick, while our EMS business entered its traditional trough period. The on-again, off-again U.S.-China trade war had its impact by creating uncertainty across global supply chains. the ultimate short and long-term impacts of these actions are still unclear. And at least for a period of time during the quarter, market shares and customer relationships seemingly had been forcefully rearranged. The electronics industry in the midst of recovery showed its resilience and things do seem to be settling down to a new norm. Even though this new norm gives us little history on how to judge our customers' results, and more importantly, outlooks. With all that said, we do seem to be entering the dawn of something pretty big. We see the overall landscape beginning to shape up. As we look into the second half, things appear to be reasonably good. There are, of course, uncertainties and risks regarding the potential sell-through of any number of products. However, we don't think anyone can tell with any reasonable amount of certainty what the appetite of global consumers will be. Nevertheless, we are hopeful about the start of the 5G promise, with at least the sub-6 gigahertz spectrum propping up the promise of faster speeds. Smaller volumes of both infrastructure and handset chips are ramping now, and we are hopeful they will be filling our 2020 capacities. And as 5G adoptions become more and more commonplace, wider millimeter wave infrastructure will be put into place and additional applications and devices will begin another ramp. We're also confident in the midst of the coming builds, our SIP products for ATM and EMS will continue to make inroads as our design wins continue across a wider customer base. And just in time for all of this, we will finally be able to work together with our teammates at Spill. So the clouds do seem to be parting. And there still may be a few rain showers here and there. But it certainly feels as if the end of the storm is near. And as a leader in the electronics manufacturing supply chain, we believe that now is the right time to invest in capital equipment. Now is the right time to invest in research projects. And now is the right time to invest in developing new product introductions. And as we mentioned in January, we're investing in the future with higher new product development spent at both ATM and EMS. These investments right now are in the product technologies like SIP and FanOut, will fuel the growth not just for the second half of 2019 into 2020. These investments will set the table for future growth drivers like millimeter wave and allow the likes of millimeter wave to take shape. 2019 will set the stage as the critical investing year. So let's start the financial overview. On page three and four, you will find our legal entity quarterly results for the holding company. and our ATM business unit. On a legal entity basis, the second quarter year-over-year results are not comparable between 2019 and 2018 because of the inclusion of spill in 2019 and the inclusion of only two months of spill in 2018. I will generally discuss the sequential and year-over-year comparisons as part of the pro forma basis slides. Let's briefly go over page three. For the legal entity, we recorded fully diluted EPS of 62 cents. and basic EPS of 63 cents. Sales were $90.7 billion with a gross profit of $14 billion and gross margin of 15.4%. Operating profit was $4.1 billion. Net income was $2.7 billion. On page four, you will find our legal entity results for our ATM business. We will discuss this in the pro forma section a bit later. Let's move forward to page five. Here we have our pro forma P&L for the consolidated holding company. To generate the historical pro forma periods, we added the historical P&Ls of each ASE and spill on a retroactive basis. We then added PPA and interest expenses related to the transaction, as if the transaction was completed as of the beginning of 2017. And lastly, we removed relevant transaction fees and expenses. Given that the fluctuations from the holding company are comprised of ATM and EMS businesses, I will try to keep the explanations here short and provide detailed explanations during each of the business unit slides. For the second quarter, we had net revenues of $90.7 billion, representing a 2% increase quarter over quarter and a 1% decline year over year. The quarter over quarter increases were primarily driven by a seasonal pickup within our ATM business offset by a larger than expected decline in our EMS revenue. The year-over-year decrease is primarily the result of a softer industry environment. Gross profits were up 23% quarter-over-quarter and down 5% year-over-year. Gross profit margin improved 2.6 percentage points on a quarter-over-quarter basis due to a better loading environment. Gross profit margin declined 0.7 percentage points on a year-over-year basis due to a softer loading environment. Our operating expense percentage was up 0.6 percentage points to 10.8% from 10.2% in the first quarter and up 0.9 percentage points on a year-over-year basis. The higher operating expense percentage is due to higher than expected EMS operating costs during the quarter. Operating profit was $4.1 billion. This represents an increase of $1.9 billion quarter over quarter and a decline of $1.6 billion year over year. Sequentially, operating margin improved 2 percentage points and was down 1.6 percentage points year over year. During the quarter, we had a net non-operating gain of $0.3 billion. This includes net interest expense of $1 billion. The remaining gain was primarily from our financial instruments and foreign exchange hedging activities. Tax expense for the quarter was $1.6 billion. For the second quarter, we booked a tax charge for our annual undistributed earnings tax in addition to a one-time transaction-related tax expense. Even though we expect a lower effective tax rate for the latter half of the year, we now expect a full year tax rate to be closer to 24%. Net income for the quarter was $2.7 billion representing an improvement of $0.6 billion from the previous quarter. On a year-over-year basis, net income was down $0.8 billion from the same period in 2018. On the bottom of the page, We have again provided here key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit, excluding PPA expenses, would be $15.2 billion with a 16.7% gross margin. Operating profit would be $5.6 billion with an operating margin of 6.2%. Net profit would be $4.1 billion with net margin of 4.6%. Basic EPS excluding PPA expenses would be $0.98. On page six is our ATM pro forma P&L. For the second quarter, revenues for our ATM business were $59.8 billion, up $5.4 billion from the previous quarter and down $2 billion from the same period last year. This represents a 10% increase sequentially and a 3% decrease year-over-year. We see the sequential revenue improvement and year-over-year revenue decline as being indicative of a mild recovery in process. We would like to note in particular that our test business is leading our ATM recovery, growing 15% quarter-over-quarter and 8% year-over-year. We feel that our strategy and investment in the test is working. Gross profits within ATM were up $2.6 billion quarter over quarter and down $0.8 billion year over year to $11.1 billion. The differences in sequential and year over year gross profits are primarily loading related. Gross margin for ATM was up 3 percentage points sequentially and down 0.7 percentage points year over year. The sequential improvement is again due primarily to higher loading. The year-over-year drop in gross margin is primarily the result of a softer loading environment. During the second quarter, operating expenses were $7.4 billion, up $0.6 billion from the first quarter, and up $0.5 billion from the same period last year. Our operating expense percentage was 12.4%, down 0.3 percentage points sequentially, and up 1.1 percentage points year over year. Sequentially, even though we spent more absolute dollars on R&D, our OpEx percentage decreased as a result of higher revenues. And on a year-over-year basis, we had a higher operating expense percentage primarily due to higher investment in R&D costs from new project ramps including fan-out and SIP projects. As some of these projects start entering mass production during the coming quarters, we expect our quarterly operating expense percentage to stay relatively flat during the coming quarter and take a more meaningful step down during the fourth quarter. During the second quarter, operating income was $3.6 billion representing an improvement of $2.1 billion quarter-over-quarter and a decline of $1.3 billion year-over-year. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 20.5% and operating profit margin would be 8.5%. Page 7, ATM operations. You'll find Here are a graphical presentation of our ATM P&L. On page 8 is our ATM revenue by market segment. As you can see here, we have a wide cross segment of the electronics industry. We generally don't see substantial changes in segment mix, especially when compared on a year-over-year basis. Page 9, the ATM revenue by service type. You can see here during the second quarter not much has changed from the first quarter. The service types are substantially similar, but from a longer-term perspective, we do see more wire bonding products moving towards bump, flip chip, and other advanced packaging. For us, we continue to expect our test business to outgrow our assembly as we continue to expand our turnkey business model. On page 10, you can see the results of our EMS business. During the second quarter, we had revenues of $31.5 billion, representing a decline of $3.4 billion, or 10% sequentially, and an increase of $1.1 billion, or 3% year over year. Our original expectations for the second quarter were based on already reduced rent rates within a few of our key consumer and communication business lines. However, demand for our EMS services were trimmed during the quarter. and the revenues for the quarter came in somewhat short of our expectations. We believe the revenue shortfall ultimately does not impact our second-half seasonal growth plans. The year-over-year increase was driven by higher revenues from our industrial and communications-related products. Our EMS gross profit stayed relatively flat, both sequentially and year-over-year, at $2.9 billion. Gross profit margin for the EMS business unit came in at 9.1%, representing a 0.7 percentage point improvement from the previous quarter. This improvement was driven by product mix and the reappropriation of production personnel to R&D for new product introductions. Compared with the previous year, EMS gross margin declined 0.3 percentage points This difference was primarily the result of generational device differences in product mix. During the quarter, our EMS business unit's operating expenses were higher than anticipated. Higher operating expenses at EMS are related principally to three items. One, the reappropriation of personnel from production to address new product introductions and customer opportunities. Two, non-China site ramp-up costs. And three, professional fees and other transactional related expenses. Operating profit for the quarter was $0.5 billion, which is a $0.2 billion decline sequentially and a $0.3 billion decline year over year. Our operating margin came in at 1.6%, which is a 0.5 percentage point decline sequentially and a 1.1 percentage point decline year over year. Operating margin was behind our initial expectations primarily as a result of lower-than-expected loading and higher-than-expected operating expenses. On page 11, you will see our product segment mix within our EMS business. Our consumer product segment declined 14 percentage points of segment share sequentially, while our communications segment increased 11 percentage points. This movement is fairly in line with our customers' product seasonality. On a year-over-year perspective, the segment shares are fairly similar outside of the weaker computing and storage segments. On page 12, you will find key line items from our balance sheet. At the end of the quarter, we had cash and cash equivalents in current financial assets of $66.3 billion. Our interest-bearing debt remained unchanged at $201.4 billion. Our unused credit lines amounted to $218.5 billion. And our EBITDA for the quarter was $18.1 billion. On page 13, you'll find our pro forma equipment capital expenditures page. Machinery and equipment capital expenditures for the second quarter totaled $444 million, of which $233 million were used in packaging, $184 million in testing, $21 million in EMS, and $6 million in interconnect material operations. We now expect a moderate step up in the amount of capital expenditures we will be spending during the year. Our capital expenditures are now on pace to be somewhat higher than 2018 as we invest for 2020 business and beyond. The extent to which capital expenditures will be pulled into 2019 or be pushed out to 2020 is currently unclear as we attempt to align our near-term needs. We hope to have more clarification available next quarter. So business definitely appears to be picking up. The third quarter is traditionally supported by a slew of differing product launches vying for a spot on consumers' holiday season wish list. It is a time when inventories are built in anticipation of forthcoming consumer demand. So for us, As products get launched throughout the third and fourth quarters, good sell-through will lead to sustained manufacturing after launch. The interesting problem we have with the latter half of this year is that in a normal year, we would be incredibly excited with the customer outlooks we have. This year, though, is not a normal year. It is a year in which we have a trade war between the two largest GDPs in the world. There may be some tariffs or there may be a lot of tariffs or there may be no tariffs at all. Supply chains may have to be shifted. Customers may have substituted vendors or components in their products. There are so many moving pieces in this environment, and no one really knows if consumers in any given geographical region will become more or less likely to buy any particular product. Though we are incredibly confident in the longer term, we really have no basis of extrapolation for the situation we are in right now. We can just make a call on what we have in front of us and wait for further clarity as the quarter develops. We're looking for our ATM business to be returning to our previous year peaks, albeit with a different product mix composition. We're targeting our margins to get close to or be similar to that peak, but for the sake of simplicity, we're just saying we will be similar with the previous third quarter in revenue and gross margin. We're looking for our EMS business to be on a pace slightly ahead of where it was in the third quarter last year, but not yet to its peak in the fourth quarter. The business should get to be somewhere in between. For us, with these types of large ramps, it's a bit more difficult to gauge where exactly in that ramp will be by the end of the third quarter. It's a bit like trying to guess the exact finishing time of a racehorse. For the sake of simplicity, midway between the two quarters would be a reasonable approximation of where our EMS business will get to. As our EMS business continues to invest in R&D for new product introductions during the latter part of 2019 into 2020, operating margins will be a little bit below our target levels. We're looking for EMS operating margins similar to first quarter 2018 levels. Do we have questions on the floor?

No questions.

Thank you. Still digesting everything. I guess the first question just on the third quarter getting back to prior peak. Maybe discuss a bit more details on how the ramp looks this year. if it's still driven by the normal mobile mix or how you're seeing from the other segments, given the trade war, just as you look at, like, consumer, auto, industrial, compute, or if you think it's just mobile-led. And if you could give an early view on sustainability, it usually seems like based on the year, fourth quarter can swing up or down. But at this stage, if you could give a follow-on view into fourth quarter.